Payday loans have been filling the income gap for many Brits and Americans, who need a small loan to carry them across a month. It can be an emergency financial crisis, where borrowing some dollars or pounds is vital for many people. There are lots of controversies associated with payday loans because of their high-interest rates. The procedure in the UK and the US is different in terms of the loan process, regulation, rates, etc.
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Payday loans difference between the UK and the US lending market
The UK market
It is 100% online. The payday lending store ‘The Money Shop’ monopolized the market but it went into administration in 2012. In 2012, the lending market was approximately valued at £2 billion per year. The lending market had been around for two decades with some notable lenders.
Wonga.com arrived on the scene and commercialized the space. During 2012, when the market reached its peak there were more than 200 lenders and 2,000+ brokers selling leads. Companies and businesses took advantage of the blithe regulations and enforced high-interest rates, hostile collection practices, and the data was sold and resold. All this grabbed foreign investors, who wanted their share in the payday boom.
In 2015, FCA was set up to control the payday loan industry, which has slowed the market pace. There was a steady price cap of 0.8%. Strict lending protocols were introduced to immediately reduce the size by 60% to 80%. FCA encouraged ex-borrowers to claim mis-sold loans [full refund with interest], which shut down shutters for the biggest lenders within several months. Wonga.com refunded more than £500 million followed by PiggyBank, The Money Shop, and Uncle Bucks.
In the UK, there are 50 payday lenders and 3 million borrowers in a year.
The US market
In the US, there are more than 20,000 payday stores spread across the country. Unlike the UK, every state in the US regulates the payday loan market. Payday loans are legalized in 37 states and operated by Native Americans.
The payday loan got online ten years ago and was forced viciously for commercial gain. It tricked borrowers with obscure wordings in the agreement. There was a huge lack of transparency. How the loan repayment worked was unclear. Today, it is regulated with strict rules that protect borrowers, making it safe for online consumers.
In the US, there are 23,000 payday lenders and 12 million borrowers in a year.
Payday loan rates
The rates are high because of the small repayment window. It does not need any guarantor or collateral and is also offered to borrowers with bad credit.
- In the UK – 1000% to 1200% APR
- In the US – 400% APR
To be compliant and regulated the lenders need to follow the underwriting process, bank checks, credit checks, and phone calls. All these incur costs. So, if the borrowed amount is £400 and repaid is £525 across three months then the lender’s gross profit includes other fees like underwriting & checks, acquisition, fast payments, and operating costs [staff, marketing & legal].